Reiterate BUY on Larsen & Toubro - Marginal miss, bracing for recovery - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities

While LT 2QFY21 revenue/EBITDA/APAT was (7)/0.4/(19)% (miss)/beat on our estimate, robust FCF generation, contained NWC, and directionally strong commentary on ordering were key positives. LT has taken impairment on key non-core assets to make them monetisation ready. Talks on Hyderabad Metro project restructuring/refinancing have been initiated, and focus is on re-investing the surplus E&A proceeds towards high RoE growth businesses. Despite near-term challenges, we reiterate BUY on LT, given its (1) strong order book (Rs 2.99tn, ~3x FY20 core EPC revenue), (2) healthy balance sheet and (3) robust services business. We tweak our FY21/FY22 estimate by 0.1/- 0.6% and keep the target price unchanged at Rs 1,260/sh.

Execution recovery underway: LT reported revenue of Rs 310bn, missing our estimate by 7%. While services business remained resilient with IT & ITES registering growth of 5% YoY and finance clocking de-growth of 3% YoY, core business faced productivity headwinds (due to social distancing norms), declining 17% YoY. Finance cost rose sharply by 52% YoY, on full commissioning of Hyderabad Metro. After adjusting the one-off gains from E&A sale (Rs 81bn) and impairment of power development assets (Rs 27bn) and funded exposure in heavy forging facility JV (Rs 11bn), APAT came in Rs 11.5bn, missing our estimates by 19. Near-normal level of labour and healthy order book would lead to execution recovery in 2HFY21.

Ex-services orders decline by 54% YoY; await pick-up in ordering: Total order inflow came in at Rs 280bn, a decline of 42% YoY. Order inflow, excluding the services, fell by 54% YoY, taking OB to Rs 2.99tn. The order pipeline stood at Rs 6.1tn (domestic Rs 4.7tn and international at Rs 1.3tn). Management expects domestic ordering activity to gain traction in 2HFY21, given the government's continuous focus on infrastructure and uptick in economic indicators and tax revenues. L&T has received LOI for Package C4 of Mumbai-Ahmedabad high-speed rail with ~Rs 250bn value.

E&A sale concluded: L&T has received Rs 132bn from the sale of E&A business, and net of taxes and costs, the total inflow amounts to Rs 110bn. L&T is planning to utilise the cash to repay Rs 50bn of debt, infuse Rs 20bn in the services business and restructure capital allocation of Hyderabad Metro (Rs 20bn committed). L&T also declared special dividend Rs 18/sh, to be paid out from the proceeds.

Balance sheet remains comfortable: With E&A proceeds consolidated net debt reduced to Rs 1tn from Rs 1.13tn on Mar 20-end. While the net working capital as a percentage of sales remains elevated at 26.7% (on low TTM Rev, <23.5% on normal base), receivables declined from Rs 407bn to Rs 361bn (vs Mar-20). L&T generated Rs 27.6bn/36.5bn of FCFF during 2Q/1HFY21, which is very robust, given the impact of the pandemic.

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.929.6 as compared to the previous close of Rs. 934.6. The total number of shares traded during the day was 233186 in over 11248 trades.

The stock hit an intraday high of Rs. 947.15 and intraday low of 924.15. The net turnover during the day was Rs. 217832632.

Source : Equity Bulls

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